MERGERS AND ACQUISITIONS DEAL -STEPS/PROCESS

This article is written by RIDHIMA SINGH LL.B. HONS -1YEAR,Allahabad University during her internship at LeDroit India.

Keywords

• Acquirer, Argumentative Planning, Economies of Scale, Diligence, Consolidation, Identifiable assets.        

Abstract

• Mergers and Acquisitions (M&A) refers to companies either consolidating or taking over other companies with the view of increasing market share and positioning in broader market. The whole process involves proper planning and strategy making which leads to virtuous[1] deal.

“Alone we can do so little; together we can do so much”

                                                                   -Hellen Keller

Introduction

As Business dynamics are changing, modern economies are also changing rapidly. To match the market competition small entities are merging up together and broadening their market share by focusing on target area. Both the term merger and acquisition are used synonymously but they mean different in law terms. Mergers means when two smaller entities combine together and form new entity. Whereas Acquisition refers to taking over of a company(smaller) by the different company(larger).

• Example of Merger– “ZEE ENTERTAINMENT ENTERPRISES LIMITED AND SONY PICTURES NETWORKS INDIA”.

• Example of Acquisition– “WALMART ACQUISITION OF FLIPKART”.

The increase in use of merger and acquisitions as important business tool in Indian business caused many problems earlier due to lack of legal data. The Companies Act ,1956 provides the provisions for mergers and acquisitions. But the meaning was still not cleared which got limpid[2] in The Companies Act, 2013(Amendment Act). According to the act of 2013, ‘Merger’ means combination of two or more entities into one. In order to bolster[3] the M&A deal following steps are needed to be followed:

STEPS INVOLVED IN M&A DEAL

1. Acquisition Strategy -The first step of the process deals with how to analyse proper strategy for particular aspects. The acquirer/ buyer should have clear intentions behind merger and acquisitions i.e.  for what purpose they are doing so, the amount they want to spend on target companies and which area they are going to work on.
2. Acquisition criteria –Once the strategy is planned the main thing acquirer needs to do is to focus on criteria under which they can get potential target markets, like cost analysis, how much the potential target companies have shares in market and what acquirers are willing to get from this acquisition, target locations etc.
3. Searching for Target–When the acquirer is done with strategy and criteria, then they have to look upon potential target companies which fits down their criteria and have a capacity to grow and perform well. The criteria should be clear so that there shouldn’t be any confusion in determining the target companies.
4. Argumentative Planning–Now, the actual process starts the acquirer carries out his view point with two-three companies, give reasons for merging up and acquisition to them and offers good value in exchange. The main purpose of this is to know about   target companies   adaptability to M&A. Here both the acquirer and seller have their initial conversations which give whole summary of what both the parties are looking for and whether its considerable for them to go ahead  or not.
5. Valuing– During the argumentative planning the interested companies share information about their financial status, company history, which allows the acquirer   to further assess the   profit gain and cost involved with the company etc. On the other end target companies are also dogged[4]   in getting a valuable deal to increase their worth in share market.
6.  Negotiations– Once the valuation is done the acquirer now should provide reasonable offer to the target company so that further both the two can negotiate. The offer could either be cash offer or stock offer. If the target company doesn’t find the offer suitable, they go on negotiating until they find a good value.
7. Due Diligence–Due diligence refers to steps which are taken by acquirer to look after the identifiable assets and liabilities of target company and review them in every aspect such as the products, customer hold and human resources to avoid further discrepancies.
8. Purchase and Sale contract– After the completion of due diligence, both the parties should now take final call to carry out agreements (purchase and sale). The parties should decide a final amount and type of payment mode they are considering. Purchase and Sale contracts should clearly mention the terms and conditions of the merger and acquisitions. It should state when the payment is to be made to the target company and whether they are giving  them cash/stock.
9. Financing –When the final contract is signed between the parties, the acquirer must start financing for the same from the sources which they figured out earlier before the merger and acquisition, in order to carry out further operations. At this stage acquirer has full power in controlling operations of acquired/merged company. They look closely after how much finance is required and how to reduce the cost.
10. Implementation/ Deal Closure–Finally after doing all the paperwork and establishing proper sources of finance, now both the entities work jointly to carry out the business. They implement clauses as per contract and that’s how the process for M&A deal completes.

• Conclusion
• With changing modern-day economies of scale , Mergers & Acquisitions have proved to be a great business tools in expanding business operations and cutting down the cost. It helps not only the investing companies as well as the smaller companies to carry out improved performances.Thus more intiatives must be taken to enhance M&A in Indian economy for substantial growth of Corporate Industries.

• References

Sites

[1] Virtuous-Good

[2] Limpid- clearance/clear

[3] Bolster-Support/Strengthen

[4] Dogged-Determined